Third Quarter Review

Portfolio Update  
- Currencies: Our Man added to S Euro position during the month.

- China Thesis: Given the signs of weakness in China during late Q3 and the likelihood that the next move in Australia was going to be easing (vs. a potential rate hike in the US) Our Man added to the S Australian Dollar position

- Equity: With the sharp pull back in Chinese equities, OM added to his position in VIPS and added a new position in JD.  Both are Internet based retailers which would benefit from the continued increased consumption in China, even as the broader economic growth (especially industrial) is slowing.  In VIPS’ case the company is already profitable, and the pullback meant it was on a reasonable valuation without even considering its growth.


Performance and Review  
Our Man’s portfolio suffered heavily with the markets during the Third Quarter, falling by 8.4% with the majority of the losses coming in August (-5.7%).  This leaves the book at -8.5% for the year, comfortably behind the market.  The markets were roiled by numerous concerns, with the slow down in China being the foremost in investors minds.

The portfolio lost money everywhere through the quarter, with the exception of the China thesis (+73bps) which benefited from the continued slide in the Australian Dollar.

The Technical book (-220bps) fell with the market over the quarter.  It was an interesting quarter for the book, with a trim signal and a sell signal generated in consecutive days.  Unfortunately, for Our Man, they were the close of trading on the 20^th/21^st…some weeks after the market peaked, but a day before it fell heavily.  With OM unable to secure the approvals to trade (which would have been moot anyways, given the sharp gap down open on the 24^th) the Technical book bore the entirety of the sharp fall to the market lows.  The upside of this, was that the decline was so fast and steep, that the market hit OM’s technical range for a pull back on that first day, so OM never traded.  This at least saved the double whammy of the Technical book capturing all of the downside, then the positions being closed as the market rallied and OM having to wait the required period (almost till October) before being able to re-enter them. 

The Equity book (-282bps)  was the largest negative contributor, and it was no surprise that given the concerns over China that it was the two Chinese Internet names represented substantially all of the loss though neither VIPS nor JD reported anything of significance during the market decline.  TTM (Tata Motors) suffered as fears over China impacted the auto-sector and the company had a plant shutdown (exacerbating it's main problem of not being able to make enough Land Rovers/Jaguars to meet demand),  though its losses were offset by gains in RDY (Dr. Reddy Pharma).

The International/Country Book (-241bps) suffered during the month, with the concerns regarding China leading to increased risk aversion which saw Peripheral Europe and Argentina both suffer.  While OM retained both sets of positions, their medium-term outlook is somewhat different.  The Argentinean positions retain the catalyst of the October/November elections, and all signals point that irrespective of which of the major candidates wins change will be coming.   Unfortunately, the same is not true of the European names where the technical damage to the charts in EWP (Spain) and especially GREK (Greece), in addition to the continued weak Earnings in those countries (making the valuations less attractive) and political problems (Grexit, Catalan votes on independence), means that OM is holding those positions (especially Greece) for the short-term bounce as he looks to potentially exit them during Q4.  The position in EWI (Italy) is currently on the bubble with the attractive valuation, not yet having been overwhelmed by the terrible technical factors.

The Currencies book (-30bps) was a small negative contributor, with both the Euro and Yen positions going against Our Man.  The future of these positions is also likely diverging, with potential additional QE and the continued fragility in Europe likely to mean there’s at least one more leg down for the Euro.  In Japan, after their aggressive QE, OM suspects that renewed commitment to yet more QE we might see a retracement of some of the fall in the Yen.  The Precious Metals book (-135bps) continued to be a disappointment, which Q3’s moves largely confirming that while OM may be right, he’s certainly early – given the fall in the equity markets, it’s no surprise that GDX (which is also the most levered to precious metals movements) represented 2/3 of the loss.

Portfolio (as at 9/30 - all delta and leverage adjusted, as appropriate) 
34.1% - International/Country (EWI/EWP/GREK in Europe, GVAL, and Argentinian names)
31.4% - Technical Book (DDM, QLD and SSO)
22.2% - Equities (JD, RDY, TTM, and VIPS) 
9.8% - Precious Metals (GDX, GLD and SLV)

-13.0% - China-Related Thesis (CROC – Short Australian Dollar) 
-22.9% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

0.2% - Cash 

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned.  He also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you.